Unwrapping Amazon's Logistics Moves (AMZN, UPS)

Amazon.com, Inc. (AMZN) CEO Jeff Bezos named his company after the river to suggest its scale and evoke its might. Given the company's recent moves, Amazon's potential is beginning to rival that of its namesake. The company, which is already an e-commerce behemoth, has plans to dominate land, sea and air as it takes its business into new markets and product lines.

Consider Amazon's moves in the past couple of years. It is experimenting with new forms of transportation, such as drones and self-driving trucks. The company has registered as an ocean freight forwarder to gain more control over the shipping of products, and it has signed a lease for 40 airplanes. (See also: Amazon Takes to the High Seas.)

The logistics market is estimated to be worth $2.1 trillion. As a company that has already disrupted retail shopping habits and is in the process of re-imagining physical retail, Amazon has a track record that could make it a suitable fit for disrupting the logistics industry. However, the Seattle-based company's ambitions in logistics appear to be driven more by the exigencies of its business than the externalities of disruption.

In addition to expanding into new markets like India, Amazon is speeding up package deliveries for its Prime members in the United States, and the company's transportation and delivery network will help bring more of the country within its reach. For example, Amazon's 75 fulfillment centers have ensured that it has an "easy two-day reach virtually anywhere in the country." (See also: Making Sense of Amazon's Move Into Logistics.)

This should help Amazon cut costs. The company reported spending $11.5 billion on shipping costs in 2015. More than of that amount was paid to logistics carriers United Parcel Service, Inc. (UPS) and FedEx Corporation (FDX), and Amazon recovered only $6.5 billion of those costs as shipping fees from customers. Analysts from Citigroup estimate that Amazon can save $1.1 billion every year if it stops paying UPS and FedEx. The analysts estimate savings of $3 or more on a typical delivery if Amazon develops its own delivery network.

Saving that amount through the use of its own delivery network would benefit consumers and Amazon's bottom line. The company has already experimented with the strategy in the United Kingdom, where it has been building out its last-mile capabilities for longer than in other countries. During a recent earnings call, Amazon CFO Brian Olsavsky alluded to the benefits of spending on the build-out. "As we get better at this and get economies of scale, we lower those costs over time," he said. (See also: Will Amazon's Logistics Ground UPS and FedEx?)

According to a Wall Street Journal report last year, the company also wants to haul packages for its vendors and other retailers, and disrupt "the traditional relationship between seller and sender." This strategy is evident in its move to become an ocean freight forwarder for products from China on its site. In addition to bringing in revenue, Amazon's advances in shipping could help the company build a broader platform for international commerce, similar to the one that rival Alibaba Group Holding Limited (BABA) is building. For example, Amazon already transports products from Chinese vendors on its site. Developing its own transportation options across international seas could help the company improve product margins by bringing in more goods from cheap markets, such as India and China, to the United States. (See also: Alibaba Invests in Best Logistics.)

However, Amazon's transformation into a logistics powerhouse is still in the future. For context, consider that UPS and FedEx together have more than 1,000 planes and 200,000 vehicles at their disposal to deliver packages for customers. Then there is the effect that increased spending on logistics could have on Amazon's balance sheet. That spending has already risen to 10.8% of sales in 2015 from 7.5% in 2010. With declining cloud margins, the company will need to show proof that investments in its delivery network are making a quantifiable difference to its bottom line. (See also: Wal-Mart Takes on Amazon With Free Two-Day Shipping.)